James C. Leonard
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thank you, Greg, and thank all of you for joining us today. We are very pleased with our financial results this quarter, reflecting focused execution throughout the bank. Our quarterly results included solid revenue growth and continued discipline on both expenses and credit. The reported earnings included a $21 million after-tax benefit or $0.03 per share from the three items noted on Page 2 of the release.
Our strong business performance throughout the bank is reflected in our return metrics. We produced an adjusted ROA of 1.32% and an adjusted ROTCE excluding AOCI of 18.7%. Improvements in our loan portfolio credit quality resulted in a $63 million release to our credit reserves and an ACL ratio of 200 basis points compared to 206 basis points last quarter. Combined with our historically low net charge-offs, we had a $42 million net benefit to the provision for credit losses.
Moving to the income statement. Net interest income of approximately $1.2 billion increased 2% compared to the year-ago quarter, reflecting the benefits of our balance sheet positioning, continuing benefits from PPP income and income from our Ginnie Mae forbearance loan purchases. Our NII results relative to the second quarter included a $6 million reduction in PPP income, a $4 million decline in prepayment penalties in our investment portfolio and the impact of lower earning asset yields, partially offset by a higher day count and a reduction in long-term debt. Our allocation to bullet and locked-out structures is currently 60% of the total investment portfolio, which is expected to continue to provide ongoing NII protection in this low rate environment.
On the liability side, we reduced our interest bearing core deposit costs another basis point this quarter to 4 basis points. With a highly asset-sensitive balance sheet and over $30 billion of excess liquidity, we continue to be well-positioned to benefit when interest rates rise, while also remaining well-hedged if rates remain low given our securities portfolio and derivatives. Total reported non-interest income increased 13% sequentially, impacted by a $60 million gain associated with the disposition of HSA deposits as previously communicated. Adjusted non-interest income increased 3%, driven by strong mortgage banking, treasury management, leasing and wealth and asset management revenues. Commercial banking revenue, which achieved record results the past two quarters remain solid as strength in M&A advisory fees, particularly in our healthcare vertical was more than offset by lower corporate bond fees.
Compared to the year-ago quarter, adjusted non-interest income increased 13% with improvement in every single caption [Technical Issues] our total non-interest revenue was 41% of total revenue in the third quarter. Reported non-interest expense increased 2% compared to the second quarter, primarily due to the $15 million Foundation contribution. Adjusted expenses were flat sequentially as an increase in marketing expense associated with momentum banking and increased T&E expense were offset by a decrease in compensation and benefits expense. Compared to the year-ago quarter, adjusted non-interest expense increased 2%, primarily driven by an increase in performance-based compensation, reflecting strong business results, servicing expenses associated with Ginnie Mae loan purchases and the impact of the Provide acquisition. These items were partially offset by lower card and processing expense due to contract renegotiation and lower net occupancy expense.
On a year-over-year basis, total adjusted fees have increased 13% compared to just 2% expense growth.
Moving to the balance sheet, total average portfolio loans and leases declined half of 8% sequentially, including the headwind from PPP loans. Excluding PPP, average loans and leases increased 1% with period end loans up 1.5%, pointing to positive momentum as we head into the fourth quarter. Average total consumer portfolio loans increased 2% as continued strength in the auto portfolio and growth in residential mortgage balances were partially offset by declines in home equity and credit card balances.
While we did not retain incremental conforming mortgage originations in the third quarter, we have elected to retain approximately $400 million of our retail mortgage production for the balance sheet in the fourth quarter and we'll continue to evaluate the economic trade-offs given our balance sheet capacity in this environment. Average commercial loans declined 2% compared to the prior quarter, due entirely to PPP forgiveness. Excluding PPP, average commercial loans increased around half of 8% with C&I loans up 2%.
Production was robust across the board, up 5% compared to the prior quarter with both corporate and middle market banking generating record production, which was well-diversified geographically. As a result, period end C&I loans excluding PPP increased 4%. Revolver utilization of 31% was stable compared to the prior quarter. However, it is worth noting that total commitments have increased approximately $5 billion since the end of last year, driven by new client acquisition and an increase in demand from existing clients in anticipation of future business growth. Average CRE loans were down 3% sequentially with lower balances in mortgage and construction, driven by elevated pay-offs in areas most impacted by the pandemic, reflecting our cautious approach to those sectors.
Our securities portfolio was stable sequentially. We continue to reinvest portfolio cash flows, but we'll remain patient on deploying the excess liquidity. Assuming no meaningful changes to our economic outlook, we would expect to begin our excess cash deployment when investment yields move north of the 200 basis point level. We remain optimistic that continued GDP growth in the Fed's eventual tapering of bond purchases will present more attractive risk return opportunities in the future. Average other short-term investments, which includes interest-bearing cash, remain elevated, reflecting growth in core deposits since the onset of the pandemic, which are up 6% year-over-year.
Moving to credit. Our strong credit performance this quarter once again reflects our disciplined client selection, conservative underwriting, prudent balance sheet management, and the continued benefit of fiscal and monetary stimulus programs and improvement in the broader economy. As Greg mentioned, the third quarter net charge-off ratio of 8 basis points was historically low and improved 8 basis points sequentially. Non-performing assets declined 15% with the NPA ratio declining 9 basis points sequentially to 52 basis points. The decline in criticized assets reflected significant improvements in retail nonessential and leisure, consistent with the reopening of the economy and higher activity in those sectors, as well as improvements in our energy and leveraged loan portfolios. We continue to focus on segments of non-owner occupied commercial real estate, particularly central business district hotels, as activity has not yet returned to pre-pandemic levels.
Moving to the ACL. Our base case macroeconomic scenario is relatively similar to last quarter, which assumes the labor market continues to improve and job growth continues to strengthen, with unemployment reaching 4% in the first quarter of 2022 and ending our three-year reasonable and supportable period at around 3.5%. We did not change our scenario weights of 60% to the base and 20% to the upside and downside scenarios. However, our ACL release was lower this quarter as the improvement in the underlying economic forecast decelerated from the second quarter. Additionally, the ACL requirement in the downside scenario worsened compared to the second quarter due to a forecasted slower pace of recovery and a larger increase in unemployment.
If the ACL were based 100% on the downside scenario, the ACL would be $788 million higher. If the ACL were a 100% weighted to the baseline scenario, the reserve would be $176 million lower. While the favorable economic backdrop in our base case expectations point to further improvement in the economy, there are several key risks factored into our downside scenario, which could play out given the uncertain environment. In addition to COVID, we continue to monitor the economic and lending implications of the supply chain and labor market constraints that currently exist. Our September 30th allowance incorporates our best estimate for the economic environment with lower unemployment and continued improvement in credit quality.
Moving to capital. Our capital levels remained strong in the third quarter. Our CET1 ratio ended the quarter at 9.8%. During the quarter, we completed $550 million in share repurchases, which reduced our share count by 14.5 million shares compared to the second quarter. We also raised our common dividend $0.03 or 11% to $0.30 per share. Our capital plans support approximately $300 million of share repurchases in the fourth quarter of 2021 and we continue to target a 9.5% CET1 by June 2022.
Moving to our fourth quarter outlook, we expect average total loan balances to increase 2% sequentially, excluding the PPP headwind. Including the PPP impact, we expect average total loans to increase approximately 1%. Our outlook reflects 0.5 of improvement from commercial revolving line utilization, continued strength in commercial production given our record pipelines and a continued stabilization in pay-downs based on activity that we are seeing so far in October. We expect average C&I growth of 4% to 5%, excluding PPP in the fourth quarter and CRE balances to decline around 1% or so, primarily due to construction constraints.
As a result, we anticipate total average commercial loan growth of around 3% sequentially excluding PPP. We expect average total consumer loan balances to increase around 1% sequentially, including the impacts of Ginnie Mae forbearance pool purchases in our held-for-sale portfolio. We purchased $300 million during the third quarter and additional $700 million in early October. Given our loan outlook, we expect NII to be down 1% sequentially in the fourth quarter, assuming stable securities balances and a $17 million reduction in PPP income. Excluding PPP, we expect fourth quarter NII to be up slightly relative to the third quarter.
Our guidance indicates full year 2021 NII declines less than 1% compared to full year 2020 despite no meaningful growth in investment securities balances throughout the year and an average decline in one-month LIBOR of approximately 40 basis points. We expect NIM to decline 3 basis points to 4 basis points in the fourth quarter, primarily due to loan yield compression. We expect fourth quarter fees to increase around 6% compared to the third quarter and to be up around 8% on a year-over-year basis, excluding the impact of the TRA. This results in full year 2021 fee growth, excluding the impacts of the TRA of approximately 10% compared to 2020. Our outlook assumes a continued healthy economy resulting in a record full year commercial banking revenue, led by 20% growth in capital markets fees, record wealth and asset management revenue up double-digits, and double-digit growth in card and processing revenue.
We expect private equity income to be in the $40 million area in the fourth quarter. Our outlook assumes a sequential decline in top-line mortgage revenue of approximately 40% with roughly half of that decline due to seasonally lower fourth quarter volumes and declining spreads and half to our decision to retain $400 million in retail production that I mentioned earlier. We expect fourth quarter expenses to be stable to up 1% compared to the third quarter, reflecting continued growth in technology investments, servicing expenses associated with the Ginnie Mae loan purchases and continued marketing support related to our roll-out of momentum, offset by disciplined expense management throughout the company and initial savings beginning from our process automation program.
As a result, our full year 2021 total core revenue growth is expected to exceed the growth in core expenses despite the rate environment. We will have achieved positive operating leverage in a year in which the vast majority of the industry will likely experience an erosion in efficiency. We expect total net charge-offs in the fourth quarter to be in the 10 basis points to 15 basis points range, which would result in full year 2021 charge-offs of 15 basis points or so.
In summary, our third quarter results were strong and continue to demonstrate the progress we have made over the past few years towards achieving our goal of outperformance through the cycle. We will continue to rely on the same principles of disciplined client selection, conservative underwriting, and a focus on a long-term performance horizon, which has served us well during this environment.
With that, let me turn it over to Chris to open the call up for Q&A.
